Whilst my own writings on this blog are – at least so far as I can make them – politically neutral, I make no secret of the fact that I am a Labour Party supporter. In light of Ed Miliband’s pledge to raise £1bn from tax avoidance, I thought I would republish (following) an article I wrote for Progress Magazine in May of this year. I haven’t touched it, but it might be worth me adding a couple of further thoughts.
On personal tax avoidance, in my opinion, the heavy lifting is done. Like it or not, this is credit in good part to the technical capacity brought to the role by an excellent Financial Secretary to the Treasury, David Gauke. I do not see scope for significant further receipts. On corporate tax avoidance, the ability of any Government to act is a function in large part of matters outside its control. We must await development and implementation of the OECD’s BEPS project. The battleground, now, is moving to evasion. On this front, I think the Conservatives’ record is less compelling. Tackling evasion is inevitably manpower heavy and I cannot see how HMRC’s capacity to close the tax gap in that field can have survived the significant cuts in HMRC staffing levels.
Labour needs to get technical on tax
You are the finance director of a large enterprise. Revenues are in the tens of billions, so obviously you pay attention to your costs. But you are also keenly interested in maximising your revenues. Right? I ask because we in Labour are not – hardly at all – interested in our revenues. As a party we debate endlessly how to spend, understandably, because spending is the end, tax the mere means. But you would still expect us to have some interest in maximising the means the better to achieve our ends.
Where we do talk about tax, the discussion concerns matters of ideological interest only. Should we raise the top rate of income tax? Your finance director cares not. She knows it will not make any material difference to her bottom line. Do it or don’t do it. It makes no difference to her. On the mechanics of how to tax, and on the detail of how to improve collection, we are almost completely silent.
The other parties talk about tax; they are interested in their revenues, the Tories especially. Ideologically, of course, they levy less, but they are skilled at maximising the rake from what they do levy. The general anti-avoidance rule, accelerated payment notices, strict criminal liability for undisclosed monies held offshore, recovery of unpaid taxes direct from bank accounts – all of these are genuinely radical measures introduced by the government and ones that Labour could have introduced, but did not.
There are a number of competing accounts of why this is so. The Tories are elected to government in times of austerity. And it is in times of austerity – when the state needs money most – that the political focus is on tax. In times of boom all anyone is interested in is how to spend the money. Another explanation – ‘stealth taxes’ being the latest of many examples – is that Labour focuses on increasing the tax base rather than reducing avoidance. Because, ideologically, we are the party that believes in levying tax we can let the collection take care of itself.
Although there is, no doubt, truth in these accounts, we cannot ignore a third. Culturally, we are not the party of money. We did not grow up with family wealth to shepherd. Outwitting the taxman is not conversation at our breakfast tables. Moreover, our parliamentarians, by and large, did not work as tax advisers before becoming members of parliament. A talented party member recently said to me that it is difficult to think of an occupation less suited than his to seeking nomination as an MP. He is a partner in the tax department of a City law firm.
The Tory selectorate is less squeamish. Tax advisers and accountants routinely become Treasury ministers. They bring with them a detailed knowledge of the craft of taxation, and Conservative tax policy is immeasurably the stronger for it.
We, on the other hand, make play with moral outrage. We give ourselves over to the cheerleaders at the public accounts committee – full of sound and fury but signifying nothing – without actually getting anything done. Our policy teams are overly reliant on briefings from the trade unions who, like everyone else, have axes to grind. But, more importantly, they do not have access to the right minds, to the leading technicians. It is Cary Grant they asked to catch a thief, not the constabulary.
To improve our effectiveness in government we must focus on tax as a means to an end rather than an end unto itself: quantifying the yield from raising the top rate of income tax should be the question on everyone’s lips, not the rhetorical flourish of whether the rich should pay their share. The fiscal carpet-bombing of increasing the base must be jettisoned for the economically efficient precision strikes of taxes which are closely drawn and effectively policed. We need unembarrassedly to welcome tax technocrats into our midst. With moral fury alone we cannot get the job done.
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Waiting for Godot 
As a Conservative Party supporter I have to say this is an excellent article.
Your statement “The battleground, now, is moving to evasion. On this front, I think the Conservatives’ record is less compelling. Tackling evasion is inevitably manpower heavy and I cannot see how HMRC’s capacity to close the tax gap in that field can have survived the significant cuts in HMRC staffing levels.” hits the nail on the head.
I can only comment on the microbusiness sector but evasion is rife. A tax office in every large town meant that HMRC staff saw what was happening locally. Nowadays it’s open house for evading VAT, income tax and National Insurance (while at the same time overclaiming Tax Credits) by being part of the cash economy. Businesses never register with HMRC, companies are struck off without any objections from HMRC, the list is endless.
The amount lost per business may be small when related to big business but when multiplied by the many hundreds of thousands involved soon becomes colossal.
Politicians must address HMRC staff levels immediately.
Thanks Stuart. A rare and welcome degree of cross party unity on a number of different tax subjects…
This is a contrarian view, but I’m not convinced by the argument that the 50p rate could not raise significant extra revenue. The analysis that was done of it had wide margins of error. The problem was that there was never a year when you couldn’t either see the increase coming and advance income, or know it was to be abolished, and defer the income.
What it did show, however, was the visceral reaction to having more than half of marginal income taken in tax – that seemed to cross a boundary for many people. Since the first forms 930 i filled in went up to 83% with 15% IIS, and 60% was in force for my formative years in the profession, I find it odd, but there you are.
It also should not be overlooked that the 45% rate seems to be reasonably well accepted because Osborne came down to it, whereas the initial reaction when Darling proposed it as a temporary measure was very negative. But the real success story for stealth income tax is the removal of the personal allowance, which raises at least as much as a 45% rate from £100,000 would if the allowances had been retained.
I should have added that HMRC have all the tools they need to tackle tax evasion at this level. They just don’t have the staff to use them.
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It’s entirely fair to say that there is no certainty about the question whether returning to the 50p rate would raise substantial extra revenue.
The study of the revenue that was raised when we adopted the 50p rate can be found here http://www.hmrc.gov.uk/budget2012/excheq-income-tax-2042.pdf. It identified two types of response to a rise in rates of income tax (i) changes to taxpayers’ propensity to engage in tax planning/avoidance/evasion and (ii) labour supply responses. The type (ii) responses included (a) a reduction in the number of hours worked and (b) a reduction in UK labour market participation. An economist would note that type (ii) responses type are particular undesirable in that they involve the loss not merely of the extra 5% but the rest of the tax that would otherwise have been paid, and that they may negatively impact growth rates and indirect tax revenues.
That report concluded, at paragraph 6.5: “The conclusion that can be drawn from the Self-Assessment data is therefore that the underlying yield from the additional rate is much lower than originally forecast (yielding around £1 billion or less), and that it is quite possible that it could be negative.” And we might add to this we have the analysis of the IFS that raising the rate to 50% is unlikely to raise significant additional revenues.
However, all of this is mere gloss on your original point, that there are substantial uncertainties around the issue. And I don’t think the authors of the report, or the IFS, would deny that that is the case.
Jolyon
Whilst I was a partner in an accounting practice (up to a couple of years ago), one of the tax issues which arose most frequently concerned the cost of taking profits out of an owner-managed company by way of dividend or remuneration as opposed to leving the profits in the company. There is a ‘price’ at which owner-managers are willing to suffer additional tax to extract surplus cash not immediately required by the business. Generally, a tax cost of around 25% appeared to be acceptable (and optimise distribution) but over 30% profits would generally be left to accumulate. The 50%/45% income tax rates and the associated higher tax extraction cost (not 50%/45% of course because of the basic rate tax credit received) lead to much lower profit extraction and, accordingly, substantial tax receipts are lost on the dividends/bonuses not extracted. Such calculations are, of course, neither tax evasion or tax avoidance and, indeed, hardly amount to planning. Many years ago (the days of 98% income tax on investment income) there was the so-called apportionment income legislation to attempt to force closely held companies to pay dividends where there was no reason to hold ‘surplus’ cash in the company. This was both complex and virtually impossible for HMRC to demonstrate and few mourned its passing.
For reasons such as this (and noting that such distributions often amounted to £100,000s or £Millions), I think there is ample reason to oppose a 45% and, especially, a 50% rate on tax collection grounds alone.
Stephen Herring
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